Shares in Capita continue to languish and the company appears to be completely out of favour with investors, although it has recently simplified its structure into two core divisions. Capita Public Service will be one of Government’s largest strategic suppliers and Capita Experience will build on a significant share of the UK and European customer experience markets. A third division is a portfolio of non-core businesses which it is hoped will realise proceeds of £700m, including £500m in the current year.
Final results for 2020 were released on 17 March. Performance was hampered by the Covid-19 pandemic and adjusted revenue fell by 9% to £3,181.2m (2019: £3,501.0m). Transactional businesses such as Capita Travel & Events and Pay360 were hit hardest. Contract losses from the prior year in areas such as local government were also damaging but this was partially offset by contract renewals and wins as well as Covid-related work. Adjusted profit before tax slumped to £65.2m (2019: £197.7m). Including the impact of restructuring costs and accounting adjustments, the reported loss before tax was £49.4m (2019: £62.6m loss) and the reported loss per share was 0.41p (2019: 4.18p). Looking ahead, the company expects to return to organic revenue growth this year and achieve sustainable cash generation in 2022. The outlook for the current year remains better than the share price would suggest and the sales pipeline includes contract bids that were delayed from 2020, such as a £925m Royal Navy training contract which has now been won.
The balance sheet is an area of concern and the company’s focus this year is to address upcoming debt maturities and put in place a longer-term financing solution. Net debt as at 31 December was £1,077.1m (2019: £1,353.2m). There are significant short-term loan note maturities, with £440m due over the next two years. However, proceeds of £299m from the completion of the ESS disposal provided around £220m of available liquidity, with a further £45m contingent on CMA clearance of buyer Montagu’s subsequent transaction with ParentPay. Capita expects to renew and extend the maturity of its revolving credit facility. It is also continuing to dispose of non-core assets, with three processes currently under way. These are ‘blue light’ emergency services software, specialist insurance businesses in partnership with Artificial Labs and the Axelos joint venture with the UK Government. Combined proceeds of at least £200m are anticipated and these should come through in the second half of the year. Further news on non-core disposals is expected in the coming months.
Capita continues to face challenges but appears to be addressing the balance sheet, which must be deterring many investors. Substantial proceeds from disposals are likely to ease concerns over the level of debt and with the shares currently worth a fraction of the level they stood at in early 2020 there is potential for a strong bounce. Our share tip is SPECULATIVE BUY.
